Slides Chapter 9 Flashcards
3 Type of Fiduciary Duties
- Duty of Obedience to Terms and Purposes of Trust, Statutory and Common Law
Obvious requirement respecting duty of administration per UTC §801
In accordance with interests of beneficiaries - Duties of Loyalty and Impartiality
In the sole interests of the beneficiaries and of all the beneficiaries - Duty of Prudence (Duty of Care)
Managing and investing the property
Includes the duty to keep the beneficiaries informed and to file reports
Duty of Obedience
Duty of Obedience to Terms and Purposes of the Trust and Law – Should be, and is, an obvious basic duty. The duty of an agent is to follow the direction of the principal and the law; this is analogous.
UTC §801. Duty to Administer Trust.
Upon acceptance of a trusteeship, the trustee shall administer the trust in good faith, in accordance with its terms and purposes and the interests of the beneficiaries, and in accordance with this [Code].
Duty of Loyalty
The duty to administer the trust solely in the interests of the beneficiaries – UTC §802(a) – a higher standard than in the best interests of beneficiaries
Voidable not void – what does this mean?
At option of beneficiaries only; not trustee or others
Act of self-dealing is voidable even if it benefits the trust or the beneficiaries
No further inquiry into bad conduct of trustee or loss to trust required in cases of self-dealing.
Duty of Loyalty
2 Restrictions on Conflicts of Interest
and 3 transaction exceptions
Transactions for trustee’s personal account (also called self-dealing) - UTC § 802(a)
Transactions between trust and those with close personal or business relationships to trustee- UTC § 802(c)
Exceptions - UTC § 802(b) – Transactions:
Authorized by terms of trust
Approved by court
Consented to by beneficiaries
Conflicts of Interest – Transactions Involving Personal or Business Relationships(Indirect Conflicts of Interest – UTC 802(c))
Who is involved?
Family members of trustee
Corporation if trustee owns shares in it, esp. if a controlling interest
Corporation if trustee is a director (e.g. bank)
Problems can arise if trustee wishes to sell trust property to business or vice versa or engage in any transactions with it or even to vote the stock
How is this different than UTC 802(a) self dealing in terms of voidability?
Presumption of voidability can be overturned by showing fairness of transaction.
UTC §802. Duty of Loyalty
Exceptions to the Duty of Loyalty
(b) a sale, encumbrance, or other transaction involving the investment or management of trust property entered into by the trustee for the trustee’s own personal account or which is otherwise affected by a conflict between the trustee’s fiduciary and personal interests is VOIDABLE by a beneficiary affected by the transaction unless:
(1) THE TRANSACTION WAS [SPECIFICALLY] AUTHORIZED BY THE TERMS OF THE TRUST;
(2) the transaction was APPROVED BY THE COURT;
(3) the beneficiary did not commence a judicial proceeding within the [applicable] time;
(4) the beneficiary CONSENTED to the trustee’s conduct, ratified the transaction, or released the trustee in compliance with [the UTC]; or
(5) the transaction involves a contract entered into or claim acquired by the trustee before the person became or contemplated becoming trustee.
Duty of Loyalty – Allowable Transactions
UTC §802. Duty of Loyalty
(g) In voting shares of stock [owned by the trust, as opposed to stock owned personally] …, the trustee shall act in the best interests of the beneficiaries…
(h) This section does not preclude the following transactions, if fair to the beneficiaries:
an agreement between a trustee and a beneficiary relating to the appointment or compensation of the trustee;
payment of REASONABLE compensation to the trustee;
a transaction between a trust and another trust, decedent’s estate, or [conservatorship] of which the trustee is a fiduciary or in which a beneficiary has an interest;
a deposit of trust money in a regulated financial-service institution operated by the [BANK] TRUSTEE; or
an advance by the trustee of money for the protection of the trust.
Rebuttable Presumption of Conflict: Intra-Family Transactions
UTC §802. Duty of Loyalty
(c) A sale, encumbrance, or other transaction involving the investment or management of trust property IS PRESUMED TO BE AFFECTED BY A CONFLICT between personal and fiduciary interests if it is entered into by the trustee with:
the trustee’s spouse;
the trustee’s descendants, siblings, parents, or their spouses;
an agent or attorney of the trustee; or
a corporation or other person or enterprise in which the trustee, or a person that owns a significant interest in the trustee, has an interest that might affect the trustee’s best judgment.
Duty to Inform and Report
(a) A trustee shall keep the QUALIFIED BENEFICIARIES of the trust reasonably informed about the administration of the trust and of the material facts necessary for them to protect their interests. Unless unreasonable under the circumstances, a trustee shall PROMPTLY RESPOND to a beneficiary’s request for information related to the administration of the trust.
UTC §813 – Duty to Inform and Report.
Request of any beneficiary
- Furnish copy of trust instrument
- Annual report of trust property, liabilities, receipts and disbursements
Required notice to qualified beneficiaries
- Within 60 days, Trustee’s name, address and phone
- Within 60 days after trustee acquires knowledge of Irrevocable Trust (or formerly revocable trust becomes irrevocable), the existence of trust, identity of settlor, right to reports and right to request copy of trust – though some states allow settlor to designate someone besides the beneficiary to receive this info (in case settlor fears the beneficiary will demand the money for drugs, or become unproductive person)
- Change in method or rate of trustee compensation
Required notice to distributees and permissible distributees
-Annual report of trust property, liabilities, receipts and disbursements
Beneficiary may waive reporting requirements and may withdraw waiver prospectively
To Whom to Report (Representation)
UTC 303 – Fiduciaries and Parents Conservator Guardian – if no conservator Agent Trustee – beneficiaries Personal representative – persons interested in estate Parent – minor and unborn children
UTC 304 – Substantially Identical Interest Minor, incapacitated, unborn or missing If not otherwise represented Substantially identical interest Particular question or dispute No conflict of interest
Duty of Impartiality
If a trust has two or more beneficiaries, the trustee shall act impartially in investing, managing, and distributing the trust property, giving due regard to the beneficiaries’ respective interests. (UTC 803)
Duty of Impartiality Among Beneficiaries
-Multiple beneficiaries; both current and future beneficiaries.
-Investment choices and distributions should generally reflect duty to be impartial. Modern Portfolio Theory and allocation of return between income and principal help solve some older sticky issues.
The prudent investor rule enables a fiduciary to invest for ‘‘total return,’’ by selecting investments based on their potential for capital appreciation as well as for their dividend and interest income, and it applies the standard of prudence to the portfolio as a whole rather than focusing on individual investments.
The rule’s central theme is the adoption of an overall investment strategy having risk and return objectives reasonably suited to the fiduciary estate.
Because there are no restrictions on specific types of assets under the prudent investor rule, a fiduciary may invest in anything consistent with the standards of the rule, which may result in a larger percentage of stocks in the portfolio than under prior law.
-Terms of trust may state that it is primarily for the benefit of one beneficiary or class of beneficiaries, e.g. the life interest beneficiaries, in which case impartiality is impossible.
Duty of Care or Prudence
“A trustee shall administer the trust as a prudent person would, by considering the purposes, terms, distributional requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.“ (UTC 804)
Managing the Property
UTC §809. Take reasonable steps to take control and protect trust property.
UTC §811. Take reasonable steps to enforce claims of the trust and defend claims against the trust
UTC §812. Take reasonable steps to collect trust property from former trustee and others holding trust property.
UTC §810. Keep adequate records of trust administration and separate (not commingle) and identify (label or earmark) property as belonging to trust.
Duty to earmark
Duty not to commingle
Investing the Property
Unif. Prud. Inv. Act §2 - A trustee shall invest and manage trust assets as a prudent investor would, by considering the purposes, terms, distribution requirements, and other circumstances of the trust. In satisfying this standard, the trustee shall exercise reasonable care, skill, and caution.
Historically, trustees tended to safe/conservative investments that were good for income but produced little appreciation thus favoring income beneficiary over remaindermen
Income came from interest, dividends, net rental income, net business income
Appreciation from increase in value of investment and capital improvements
Switch to Prudent Investor Rule employing Modern Portfolio Theory – not asset by asset but entire portfolio
Risk and return suited to trust and needs of beneficiaries
List of factors to consider – economic conditions, terms of trust and needs of beneficiaries, e.g. older income beneficiary would suggest more conservative approach
No restrictions on particular investments
Trustee must use special skills, if any
Delegation and Diversification
Portfolio assets should be diversified to minimize investment risk – unless there is a good reason not to diversify.
Duty to minimize costs - UPIA Sec. 7 - In investing and managing trust assets, a trustee may only incur costs that are appropriate and reasonable in relation to the assets, the purposes of the trust, and the skills of the trustee.
Delegation
Ministerial/Discretionary
UPIA Sec. 9 - Can delegate investment decision making if the trustee exercises reasonable care, skill and caution in: selecting an agent; establishing scope of delegation; reviewing performance.
Trust Protectors & Powers to Direct
Examples of powers to direct:
Make investment decisions
Run a family business
Remove and replace trustees
Make discretionary distributions
Modify or terminate the trust
Person holding power is a fiduciary
Trustee must follow direction unless:
Manifestly contrary to terms of trust or
Serious breach of fiduciary dutyRemoval of Trustees
Normally for a serious breach of trust
Lack of cooperation, esp. among co-trustees, that substantially impairs administration of trust
Agreement among beneficiaries
Bottom line - Removal best serves interests of beneficiaries
Remedies for Breach of Trust
UTC SECTION 1001. REMEDIES FOR BREACH OF TRUST.
(a) A violation by a trustee of a duty the trustee owes to a beneficiary is a breach of trust.
(b) To remedy a breach of trust that has occurred or may occur, the court may:
(1) compel the trustee to perform the trustee’s duties;
(2) enjoin the trustee from committing a breach of trust;
(3) compel the trustee to redress a breach of trust by paying money, restoring property, or other means;
(4) order a trustee to account;
(5) appoint a special fiduciary to take possession of the trust property and administer the trust;
(6) suspend the trustee;
(7) remove the trustee as provided in Section 706;
(8) reduce or deny compensation to the trustee;
(9) subject to Section 1012, void an act of the trustee, impose a lien or a constructive trust on trust property, or trace trust property wrongfully disposed of and recover the property or its proceeds; or
(10) order any other appropriate relief.
Uniform Principal and Income Act (UPIA)
UPIA 103(a) - In allocating receipts and disbursements to or between principal and income, and with respect to any matter within the scope of [Articles] 2 and 3, a fiduciary:
(1) shall administer a trust or estate in accordance with the terms of the trust or the will, even if there is a different provision in this [Act]; (2) may administer a trust or estate by the exercise of a discretionary power of administration given to the fiduciary by the terms of the trust or the will, even if the exercise of the power produces a result different from a result required or permitted by this [Act];
UPIA 103(b) - In exercising the power to adjust … a fiduciary shall administer a trust or estate impartially, based on what is fair and reasonable to all of the beneficiaries, except to the extent that the terms of the trust or the will clearly manifest an intention that the fiduciary shall or may favor one or more of the beneficiaries. A determination in accordance with this [Act] is presumed to be fair and reasonable to all of the beneficiaries.
Adjusting Between P&I
UPIA 104(a) A trustee may adjust [receipts and disbursements] between principal and income to the extent the trustee considers necessary if the trustee (i) invests and manages trust assets as a prudent investor, (ii) the terms of the trust describe the amount that may or must be distributed to a beneficiary by referring to the trust’s income, and (iii) the trustee determines, after applying the rules in Section 103(a), that the trustee is unable to comply with Section 103(b).
UPIA 104(b) - In deciding whether and to what extent to exercise the power conferred by subsection (a), a trustee shall consider all factors relevant to the trust and its beneficiaries, including the following factors to the extent they are relevant:
(1) the nature, purpose, and expected duration of the trust;
(2) the intent of the settlor;
(3) the identity and circumstances of the beneficiaries;
(4) the needs for liquidity, regularity of income, and preservation and appreciation of capital;
(5) the assets held in the trust; the extent to which they consist of financial assets, interests in closely held enterprises, [etc.] (6) the [normal allocation rules];
(7) …the terms of the trust …;
(8) the actual and anticipated effect of economic conditions on principal and income and effects of inflation and deflation; and
(9) the anticipated tax consequences of an adjustment.
